Derivatives trading methods that use a variable order price and a hedge transaction

ABSTRACT

Systems and methods are provided for executing a hedge transaction in connection with the execution of a derivative product order in which the price of the derivative product is defined by one or more variables. The hedge transaction may be executed at an exchange or match engine that is different from the exchange or match engine executing the derivative product order. The execution of derivative product transaction may be contingent on the existence of an appropriate hedge transaction. Alternatively, a best efforts approach may be used to fill the hedge transaction order after executing the derivative product transaction.

[0001] The present application is a continuation-in-part of U.S. patentapplication Ser. No. 10/385,152, filed Mar. 10, 2003, the entiredisclosure of which is hereby incorporated by reference.

FIELD OF THE INVENTION

[0002] The present invention relates to derivative product tradingmethods and systems and, in particular, to methods and systems thatutilize a variable defined order price and a hedge transaction.

DESCRIPTION OF THE RELATED ART

[0003] Computer systems and networks increasingly are being used totrade securities and derivatives. Computer systems and networks provideseveral advantages when compared to manual methods of trading. Suchadvantages include increased accuracy, reduced labor costs and theability to quickly disseminate market information.

[0004] Options are frequently traded via computer systems and methods.An option may be used to hedge risks by allowing parties to agree on aprice for a purchase or sale of another instrument that will take placeat a later time. One type of option is a call option. A call optiongives the purchaser of the option the right, but not the obligation, tobuy a particular asset either at or before a specified later time at aguaranteed price. The guaranteed price is sometimes referred to as thestrike or exercise price. Another type of option is a put option. A putoption gives the purchaser of the option the right, but not theobligation, to sell a particular asset at a later time at the strikeprice. In either instance, the seller of the call or put option can beobligated to perform the associated transactions if the purchaserchooses to exercise its option or upon the expiration of the option.

[0005] Traders typically use theoretical models to determine the pricesat which they will offer to buy and sell options. The theoretical optionpricing models often produce values that reflect an option's sensitivityto changes in predefined variables. These predefined variables areassigned Greek letters, such as delta, gamma, theta, and vega. Delta isa measure of the rate of change in an option's theoretical value for aone-unit change in the price of the option's underlying contract. Thus,delta is the theoretical amount by which the option price can beexpected to change for a change in the price of the underlying contract.As such, delta provides a local measure of the equivalent position riskof an option position with respect to a position in the underlyingcontract. A “50 Delta” option should change its price {fraction(50/100)}, or ½ a point, for a one point move in its underlyingcontract.

[0006] Gamma is a measure of the rate of change in an option's delta fora one-unit change in the price of the underlying contract. Gammaexpresses how much the option's delta should theoretically change for aone-unit change in the price of the underlying contract. Theta is ameasure of the rate of change in an option's theoretical value for aone-unit change in time to the option's expiration date. Vega is ameasure of the rate of change in an option's theoretical value for aone-unit change in the volatility of the underlying contract. Delta,gamma, and vega are the primary risk management measures used by thosewho trade in options.

[0007] A single option order typically identifies the underlyingsecurity, the expiration date, whether the option is a call or a put,the strike price and all other standard order terms (e.g. buy/sell,quantity, account number etc.). Each time the price of the underlyingcontract changes or one of the variables in the trader's theoreticalmodel changes, a trader may cancel all of the relevant orders,recalculate new order prices and transmit new order prices to theexchange.

[0008] It is common for traders of options contracts to hedge risks bypurchasing underlying futures contracts. In a pit-traded environment,after executing an options transaction, the trader would typically turnto the futures pit and attempt to execute a hedge transaction. Forexample, after purchasing 50 call options contracts of eurodollars witha 50 delta strike, the trader would seek to purchase 25 eurodollarfutures contracts.

[0009] Existing trading systems methods do not allow traders to purchasederivative products, such as options, by providing a variable definedderivative product order price. Such systems also do not allow tradersto identify a hedge transaction to be automatically submitted when thederivative product order is filled.

[0010] Therefore, there is a need in the art for improved derivativeproduct trading methods and systems that allow traders to use variabledefined derivative product order prices and identify corresponding hedgetransactions.

SUMMARY OF THE INVENTION

[0011] The present invention overcomes the problems and limitations ofthe prior art by providing methods and systems that utilize a variabledefined derivative product order price. Derivative products includeoptions on futures contracts, futures contracts that are functions of orrelate to other futures contracts, or other financial instruments thathave their price related to or derived from an underlying product. Thevariable defined derivative product order price may be in the form of amodel used to price options. When one of the variables of the modelchanges, an exchange computer system may recalculate the derivativeproduct's price without requiring the trader to transmit additional ordifferent information to the computer system.

[0012] The derivative product order may also identify one or morecorresponding hedge transactions or include information that may be usedto identify a hedge transaction. The execution of the derivative productorder may be contingent on the availability of a hedge transaction.Alternatively, a best efforts approach may be used to fill a hedgetransaction order after the execution of the derivative product order.

[0013] In one embodiment, advantages of aspects of the present inventionare provided by a method of executing a variable priced derivativeproduct order that is contingent on the existence of a correspondinghedge transaction. The method includes receiving at a match system avariable priced order for a derivative product. The variable pricedorder may include a derivative product identifier, an underlying productidentifier and at least one price determination variable. Next, apotential derivative product transaction is identified and a search fora hedge product transaction that corresponds to the potential derivativeproduct transaction is conducted. The derivative product transaction isexecuted only when a hedge transaction is available.

[0014] In another embodiment, advantages of aspects of the presentinvention are provided by a method of hedging risks associated with thepurchase of a variable priced derivative product. The method includesexecuting, at a match system, a variable priced derivative productorder. Order risk data is received from an order risk management module.Next, a best efforts approach is used to locate a potential hedgetransaction that corresponds to the derivative product order. Data ofthe potential hedge transaction is compared to the order risk data. Inone implementation, the potential hedge transaction is executed when theorder risk data is not exceeded. In other implementations, the potentialhedge transaction is executed as long as the order risk data is notexceeded prior to the hedge transaction. In still other implementations,a portion of the hedge transaction is cancelled to prevent exceeding theorder risk data.

[0015] In other embodiments, the present invention can be partially orwholly implemented on a computer-readable medium, for example, bystoring computer-executable instructions or modules, or by utilizingcomputer-readable data structures.

[0016] Of course, the methods and systems of the above-referencedembodiments may also include other additional elements, steps,computer-executable instructions, or computer-readable data structures.In this regard, other embodiments are disclosed and claimed herein aswell.

[0017] The details of these and other embodiments of the presentinvention are set forth in the accompanying drawings and the descriptionbelow. Other features and advantages of the invention will be apparentfrom the description and drawings, and from the claims.

BRIEF DESCRIPTION OF THE DRAWINGS

[0018] The present invention may take physical form in certain parts andsteps, embodiments of which will be described in detail in the followingdescription and illustrated in the accompanying drawings that form apart hereof, wherein:

[0019]FIG. 1 shows a computer network system that may be used toimplement aspects of the present invention;

[0020]FIG. 2 illustrates a system in which traders exchange informationwith a match system, in accordance with an embodiment of the invention;

[0021]FIG. 3 illustrates a variable defined derivative product order inaccordance with an embodiment of the invention;

[0022]FIG. 4 illustrates a computer implemented method of trading aderivative product contract that involves the use of a variable orderprice, in accordance with an embodiment of the invention;

[0023]FIG. 5 illustrates a method of processing variable definedderivative product orders by an exchange computer, in accordance with anembodiment of the invention, when the variable defined derivativeproduct orders do not include the identification of hedge transactions;

[0024]FIG. 6 illustrates a method of processing variable definedderivative product orders that are contingent on the existence of hedgetransactions, in accordance with an embodiment of the invention;

[0025]FIG. 7 illustrates a method of processing variable definedderivative product orders that require a best efforts approach tofinding hedge transactions, in accordance with an embodiment of theinvention; and

[0026]FIG. 8 illustrates a method of synthetically matching unresolvedhedge transaction orders for orders belonging to a common class, inaccordance with an embodiment of the invention.

DETAILED DESCRIPTION OF THE INVENTION

[0027] Aspects of the present invention are preferably implemented withcomputer devices and computer networks that allow users to exchangetrading information. An exemplary trading network environment forimplementing trading systems and methods is shown in FIG. 1. An exchangecomputer system 100 receives orders and transmits market data related toorders and trades to users. Exchange computer system 100 may beimplemented with one or more mainframe, desktop or other computers. Auser database 102 includes information identifying traders and otherusers of exchange computer system 100. Data may include user names andpasswords potentially with other information to identify users uniquelyor collectively. An account data module 104 may process accountinformation that may be used during trades. A match engine module 106 isincluded to match bid and offer prices. Match engine module 106 may beimplemented with software that executes one or more algorithms formatching bids and offers. A trade database 108 may be included to storeinformation identifying trades and descriptions of trades. Inparticular, a trade database may store information identifying the timethat a trade took place and the contract price. An order book module 110may be included to compute or otherwise determine current bid and offerprices. A market data module 112 may be included to collect market dataand prepare the data for transmission to users. A risk management module134 may be included to compute and determine a user's risk utilizationin relation to the user's defined risk thresholds. An order processingmodule 136 may be included to decompose variable defined derivativeproduct and aggregate order types for processing by order book module110 and match engine module 106.)

[0028] The trading network environment shown in FIG. 1 includes computerdevices 114, 116, 118, 120 and 122. Each computer device includes acentral processor that controls the overall operation of the computerand a system bus that connects the central processor to one or moreconventional components, such as a network card or modem. Each computerdevice may also include a variety of interface units and drives forreading and writing data or files. Depending on the type of computerdevice, a user can interact with the computer with a keyboard, pointingdevice, microphone, pen device or other input device.

[0029] Computer device 114 is shown directly connected to exchangecomputer system 100. Exchange computer system 100 and computer device114 may be connected via a TI line, a common local area network (LAN) orother mechanism for connecting computer devices. Computer device 114 isshown connected to a radio 132. The user of radio 132 may be a trader orexchange employee. The radio user may transmit order or otherinformation to a user of computer device 114. The user of computerdevice 114 may then transmit the trade or other information to exchangecomputer system 100.

[0030] Computer devices 116 and 118 are coupled to a LAN 124. LAN 124may have one or more of the well-known LAN topologies and may use avariety of different protocols, such as Ethernet. Computers 116 and 118may communicate with each other and other computers and devicesconnected to LAN 124. Computers and other devices may be connected toLAN 124 via twisted pair wires, coaxial cable, fiber optics or othermedia. Alternatively, a wireless personal digital assistant device (PDA)122 may communicate with LAN 124 or the Internet 126 via radio waves.PDA 122 may also communicate with exchange computer system 100 via aconventional wireless hub 128. As used herein, a PDA includes mobiletelephones and other wireless devices that communicate with a networkvia radio waves.

[0031]FIG. 1 also shows LAN 124 connected to the Internet 126. LAN 124may include a router to connect LAN 124 to the Internet 126. Computerdevice 120 is shown connected directly to the Internet 126. Theconnection may be via a modem, DSL line, satellite dish or any otherdevice for connecting a computer device to the Internet.

[0032] One or more market makers 130 may maintain a market by providingbid and offer prices for a derivative or security to exchange computersystem 100. Exchange computer system 100 may also exchange informationwith other trade engines, such as trade engine 138. One skilled in theart will appreciate that numerous additional computers and systems maybe coupled to exchange computer system 100. Such computers and systemsmay include clearing, regulatory and fee systems. Coupling can be directas described or any other method described herein.

[0033] The operations of computer devices and systems shown in FIG. 1may be controlled by computer-executable instructions stored oncomputer-readable medium. For example, computer device 116 may includecomputer-executable instructions for receiving order information from auser and transmitting that order information to exchange computer system100. In another example, computer device 118 may includecomputer-executable instructions for receiving market data from exchangecomputer system 100 and displaying that information to a user.

[0034] Of course, numerous additional servers, computers, handhelddevices, personal digital assistants, telephones and other devices mayalso be connected to exchange computer system 100. Moreover, one skilledin the art will appreciate that the topology shown in FIG. 1 is merelyan example and that the components shown in FIG. 1 may be connected bynumerous alternative topologies.

[0035]FIG. 2 illustrates a system in which traders 202 and 204 exchangeinformation with a match system 206, in accordance with an embodiment ofthe invention. Trader 202 is shown transmitting a variable definedderivative product order 208 and a limit data 210 to match system 206.Variable defined derivative product order 208 includes theidentification of a derivative product and a variable order price.Variable defined derivative product orders are described in greaterdetail below in connection with FIG. 3. Limit data 210 may act as athrottle to limit the number of transactions entered into by trader 202.Limited data is also described in greater detail below. Trader 204transmits derivative product orders 212 and 216 to match system 206.Each trader may transmit several derivative product orders and mayassociate limit data with one or more of the derivative product orders.As shown in order 212, one or more of the orders may include theidentification of a hedge transaction.

[0036] Match system 206 may include several modules for determiningprices, matching orders and executing transactions. An order book module218 may be included to maintain a listing of current bid and offerprices. A price calculation module 220 calculates order prices based onprice determination variables provided as part of variable definedderivative product orders. Price calculation module 220 may alsocalculate order prices based on formulas received from traders. Forexample, derivative product order 208 may include a formula that is afunction of an underlying contract, delta and gamma. Price calculationmodule 220 may be configured to calculate an order price every time theprice of the underlying contract changes.

[0037] Price calculation module 220 may use a default formula with pricedetermination variable values supplied by a trader. In one embodiment,the change in a derivative product price is equal to a second orderTaylor series expansion, such as:

ChgUnderlyingPrice*delta+(½(ChgUnderlyingPrice{circumflex over( )}2*gamma))  (1)

[0038] wherein ChgUnderlyingPrice is the change in the underlying price.A trader would supply price determination variables delta and gamma andprice calculation module would track the derivative product price as theunderlying contract changes.

[0039] An order risk management module 222 may be included to act as alimit for the user's exposure for a given risk variable as defined bythe user. For example, trader 202 provided maximum and minimum delta,gamma and vega values to match system 206. Those values may be stored inorder risk management module 222 and computed before executingtransactions. Depending on the user's order types and risk utilizationfor a given risk variable, the user's resting orders for a particularcontract may be auto canceled by match system 206 so that the user is nolonger at risk to exceed their limits. In addition, and depending on theuser's order type and risk utilization for a given risk variable, theuser's ability to enter a buy or sell order may be prohibited should theexecution of that order cause the user to exceed their particular orderrisk management limit. Order risk module may be used to limit a user'sexposure during the processing of derivative product orders and/or hedgetransaction orders.

[0040] A formula database 224 may be included to store derivativeproduct order formulas. The formulas may be provided by traders or maybe standard formulas provided by an exchange. A market data module 226may be used to collect and disseminate market data. A match enginemodule 228 matches bid and offer prices. Match engine module 228 may beimplemented with software that executes one or more algorithms formatching bids and offers.

[0041] A hedge module 230 may be included to perform hedge transactionsbased on derivative product transactions. In one embodiment of theinvention, hedge module 230 conducts transactions with a trading engineor match system other than match system 206. Hedge module 230 may alsoperform some or all of the function of risk management module 134 (shownin FIG. 1). Exemplary hedge transactions are described in detail belowwith references to FIGS. 6 and 7.

[0042] An order processing module 236 may be included to decompose deltabased and bulk order types for processing by order book module 218 andmatch engine module 228. A controller 232 may be included to control theoverall operation of the components shown coupled to bus 234. Controller232 may be implemented with a central processing unit. Match system 206may include modules that perform some or all of the functions of themodules shown in FIG. 1. Moreover, match system 206 may also be coupledto some or all of the elements shown in FIG. 1.

[0043]FIG. 3 illustrates a variable defined derivative product order 300in accordance with an embodiment of the invention. Variable definedderivative product order 300 may include a field 302 for identifying atrader's account number. The underlying contract may be identified infield 304. The expiration month of the derivative product order may beidentified in field 306. The order may be identified as a put or a callin field 308 and whether the order is a buy or sell in field 310. Thequantity may be identified in field 312 and the strike price may beidentified in field 314. Delta, gamma, and vega values may be identifiedin fields 316, 318 and 320 respectively. Of course, other pricedetermination variables may also be identified as part of a standardvariable defined derivative product order.

[0044] A hedge transaction may be identified in field 322. The user maychoose to make the derivative product order contingent on the existenceof an available hedge transaction by selecting radio button 324. Theuser may also choose to use best efforts to fill the hedge order afterthe execution of the derivative product order by selecting radio button326.

[0045] The formula for calculating the price of variable definedderivative product order is identified in field 328. The trader canselect a standard formula 330 to compute their derivative product priceor select a custom formula 332. In one embodiment, a standard formula issupplied by or sponsored by an exchange. When a custom formula isselected, the trader may also provide a formula in field 334 and thevariables in field 336. In one implementation of the invention, variabledefined derivative product order 300 is created in the form of an XMLfor HTML document created by one of the computer devices shown inFIG. 1. Variable defined derivative product order 300 may be encryptedbefore being transmitted to an exchange. Of course one or moreadditional or alternative fields may be included. For example, areference price may be included to protect against in flight conditionswhen the reference price changes while variable defined derivativeproduct order 300 is in transit.

[0046]FIG. 4 illustrates a computer-implemented method of trading aderivative product contract that involves the use of a variable orderprice, in accordance with an embodiment of the invention. First, in step402 it is determined whether the trader desires to use a standardexchange sponsored formula. When the trader uses a custom formula, theformula is transmitted to the exchange computer in step 404. Step 404may also include the trader or exchange transmitting the formula toother market participants. In step 406, the trader transmits pricedetermination variable values for the standard formula to an exchangecomputer. For example, step 406 may include transmitting delta and gammavalues to an exchange computer. In step 408 the trader receivesunderlying data. The underlying data may include current bid and offerprices for underlying put and call futures contracts.

[0047] In step 410 it is determined whether the underlying data haschanged. The price of an underlying contract may change multiple timesper second. When the underlying contract data has changed, in step 412the trader's computer device may recalculate the order price of theirdelta based order and all other delta based orders from other usersbased on current data. In step 414, it is determined whether any of theprice determination variables used in the formula to calculate the orderprice have changed. The price determination variables may include delta,gamma, and vega. When the price determination variables have changed, instep 412, the order price is recalculated. Of course, step 412 may beperformed based on changes in current underlying contract data andvariables. The order price may be displayed to the trader or plotted ona graph that tracks order prices.

[0048] Some of the advantages of aspects of the present invention arethat they allow traders to maintain an order book and limit the amountof information that must be disseminated by an exchange computer ormatch system. In particular, an exchange computer or match system maytransmit a plurality of variable defined derivative product orders toseveral different traders only when other derivative product order usersestablish their initial positions. Thereafter, the exchange computer maythen only transmit underlying data or other data used to calculatevariable defined derivative product order prices. Each trader computermay then periodically calculate current order prices based oninformation received from the exchange computer. For example, in step416 it is determined whether other variable defined derivative productorders are received. When variable defined derivative product orders arereceived, in step 418 the trader computer may calculate new order booklistings for current bids and offers related to variable definedderivative product based orders. The order book may be displayed to thetrader in any one of a variety of conventional formats. After step 418,control returns to step 408.

[0049]FIG. 5 illustrates a method of processing variable definedderivative product orders by an exchange computer, in accordance with anembodiment of the invention, when the variable defined derivativeproduct orders do not include the identification of hedge transactions.First, in step 502 the exchange computer receives variable definedderivative product orders. As described above, the variable definedderivative product orders may be in the form of one or more formulascontaining one or more price determination variables. In step 504, theexchange computer may receive order risk management information to limitthe trader's exposure for a particular risk variable as given by thetrader. Next, the exchange computer may receive or otherwise producemarket data in step 506. The market data may include current underlyingprices that may be used to calculate variable defined derivative productorder prices. In step 508, bid and offer prices are calculated. Thecalculations may be based on a combination of formulas and variablesprovided by traders and/or the exchange. In step 510 the exchangecomputer finds a matching bid and offer. A matching bid and offer may befound by match engine 228. Before executing a transaction, in step 512it is determined whether one or more order risk management limitsprovided by the trader have been exceeded. When a limit has beenreached, all outstanding orders that contribute to the risk limit beingexceeded further are automatically cancelled by the computer system instep 514. When the limits have not been exceeded, in step 516 thederivative product transaction is executed. Of course, an exchangecomputer may be configured to repeat the method shown in FIG. 5 severaltimes.

[0050]FIG. 6 illustrates a method of processing variable definedderivative product orders that are contingent on the existence of hedgetransactions, in accordance with an embodiment of the invention. First,in step 602 a variable defined derivative product order is received. Theorder received in step 602 is preferably received at a match system andmay identify a hedge product transaction. Next, a potential derivativeproduct transaction is identified in step 604. Step 604 may includecalculating a price of the derivative product order using aspects of theinvention described above. Step 606 includes searching for acorresponding hedge product transaction. The hedge product transactionis one that hedges against the risks associated with the variabledefined derivative product transaction. In one embodiment of theinvention, step 606 includes searching for the hedge product transactionin the same match system as a match system used for the derivativeproduct transaction. The use of the same match system facilitateslocking in both the hedge product transaction and the derivative producttransaction before execution of either transaction. In an alternativeembodiment, the search for hedge product transaction takes place in adifferent match system.

[0051] Next, in step 608 it is determined whether the hedge producttransaction is available. Step 608 may include determining whether thehedge product transaction satisfies predetermining criteria provided bythe user or match system. When the hedge transaction is not available,in step 610 the derivative product execution does not occur and theprocess ends. When the hedge product transaction is available, in step612 the derivative product transaction and hedge product transaction areboth executed. The hedge transaction and the hedge product transactionmay be locked in and executed by the same match system.

[0052]FIG. 7 illustrates a method of processing variable definedderivative product orders that require a best efforts approach tofinding hedge transactions, in accordance with an embodiment of theinvention. First, in step 702 a match system receives a variable definedderivative product order. The derivative product order may identify ahedge product transaction. Next, in step 704 the derivative producttransaction is executed. Step 704 may include aspects of the inventiondescribed above. In particular, the execution of the derivative producttransaction may include calculating a variable defined derivativeproduct order price.

[0053] In step 706 the match system receives order risk data from anorder risk management module, such as order risk management module 222shown in FIG. 2. The order risk data may include maximum and/or minimumdelta and/or gamma values, described above. Next, in step 708 a bestefforts approach is used to locate a potential hedge producttransaction. The potential hedge transaction may comprise the fill orkill transaction. In one alternative embodiment, that transaction maycomprise a fill and kill transaction. Next, in step 710 it is determinedwhether the order risk data has been exceeded. Step 710 may includecomparing the order risk data received in step 706 to data relating tothe potential hedge transaction. When the order risk data would beexceeded, all of the user's risk increasing orders are canceled and theprocess ends in step 712. When the order risk data would not beexceeded, in step 714 the hedge product transaction is executed.

[0054] The method shown in FIG. 7 illustrates one exemplary method inwhich a potential hedge transaction will not be executed if thepotential transaction would cause the risk data to be exceeded. In otherembodiments, only a portion of the potential hedge transaction isexecuted. For example, if the potential hedge transaction involves 100contracts and the 52^(nd) contract would cause the risk data to beexceeded, a match system would execute a trade for either 51 or 52contracts. In another alternative embodiment, the match system willexecute the entire potential hedge transaction as long as the risk datais not exceeded just prior to execution of the potential hedgetransaction, regardless of whether risk data will be exceeded after thetransaction.

[0055] A trader may buy or sell several variable defined derivativeproduct contracts in a common class and have a need for multiple hedgetransactions. FIG. 8 illustrates a method of synthetically matchingunresolved hedge transaction orders for orders belonging to a commonclass. First in step 802, unresolved hedge transaction orders having apositive value of an order risk variable are prioritized. The prioritymay be based on the magnitudes of the order risk variable. As describedabove, one order risk variable is delta. In step 804 the unresolvedhedge transaction orders having a negative value of the order riskvariable are prioritized. Next, in step 806 the unresolved hedgetransaction orders are synthetically matched according to the prioritiesidentified in steps 802 and 804.

[0056] After the synthetic matching, in step 808 it is determinedwhether any residual unresolved hedge transactions exist. When noneexist, the process ends in step 810. When one or more residualunresolved hedge transactions exist, a potential hedge transaction islocated in step 812. Next, in step 814 it is determined whether theexecution of the potential hedge transaction would violate an order riskdata rule. Of course step 814 may include determining whether or not thepotential hedge transaction would violate more than one order risk datarule. Exemplary order risk data rules have been described above. Whenthe rule would be violated, the process ends in step 810. When the rulewould not be violated, the potential hedge transaction is executed instep 816.

[0057] The present invention has been described herein with reference tospecific exemplary embodiments thereof. It will be apparent to thoseskilled in the art, that a person understanding this invention mayconceive of changes or other embodiments or variations, which utilizethe principles of this invention without departing from the broaderspirit and scope of the invention as set forth in the appended claims.All are considered within the sphere, spirit, and scope of theinvention. For example, while aspects of the present invention have beendescribed in connection with the trading of derivative products, inother embodiments, aspects of the invention may be used in connectionwith the trading of securities, such as debt, foreign exchange, andequity contracts, and other instruments for which options or otherderivative instruments are traded. Moreover, aspects of the inventionmay be used with over the counter market transactions. Hedgetransactions may include over the counter trades or exchange tradedcontracts. One example of an over the counter trade is a forwardcontract.

What is claimed is:
 1. A method of hedging risks associated with thepurchase of a variable defined derivative product, the methodcomprising: (a) executing at a match system a variable definedderivative product order; (b) receiving order risk data from an orderrisk management module; (c) using a best efforts approach to locate apotential hedge transaction that corresponds to the derivative productorder; (d) comparing data of the potential hedge transaction to theorder risk data; and (e) executing the potential hedge transaction whena rule is not violated.
 2. The method of claim 1, wherein (a) comprisescalculating a price of the derivative product order.
 3. The method ofclaim 2, wherein the price of the derivative product is a function of anoriginal order price, an updated price of an underlying product and atleast one price determination variable value based on a predeterminedformula.
 4. The method of claim 3, wherein the at least one pricedetermination variable value includes values for a delta variable and agamma variable and the predetermined formula comprises: Change in priceof the order=ChgUnderlyingPrice*delta+(½(ChgUnderlyingPrice{circumflexover ( )}2*gamma)) where ChgUnderlyingPrice is the change in price ofthe underlying product, delta is the rate of change of the price of thederivative product with the price of the underlying product and gamma isthe rate of change of delta with respect to the derivative productprice.
 5. The method of claim 4, wherein the order risk data comprises avalue of delta.
 6. The method of claim 5, wherein the order risk datacomprises a value of gamma.
 7. The method of claim 1, wherein (c)comprises using a match system that is different than the match systemused in (a).
 8. The method of claim 1, wherein the derivative productcomprises an options contract and the hedge product comprises a futurescontract.
 9. The method of claim 1, wherein information for the hedgeproduct transaction is included in an order for the variable definedderivative product.
 10. The method of claim 1, wherein the potentialhedge transaction comprises a fill or kill transaction.
 11. The methodof claim 1, wherein the potential hedge transaction comprises a fill andkill transaction.
 12. The method of claim 1, wherein the rule in (e)requires that the order risk data not be exceeded after the potentialhedge transaction.
 13. The method of claim 1, wherein the rule in (e)requires that the order risk data not be exceeded before the potentialhedge transaction.
 14. The method of claim 1, wherein the potentialhedge transaction includes a plurality of contracts and (e) comprises:(i) identifying the lowest number of the contracts that will cause theorder risk date to be exceeded; and (ii) executing a transaction thatincludes the number of contracts identified in (i).
 15. The method ofclaim 1, wherein the potential hedge transaction includes a plurality ofcontracts and (e) comprises: (i) identifying the lowest number of thecontracts that will cause the order risk date to be exceeded; and (ii)executing a transaction that includes one less than the number ofcontracts identified in (i).
 16. A method of synthetically matchingunresolved hedge transaction orders for orders belonging to a commonclass, the method comprising: (a) prioritizing unresolved hedgetransaction orders having a positive value of an order risk variable;(b) prioritizing unresolved hedge transaction orders having a negativevalue of the order risk variable; and (c) synthetically matching theunresolved hedge transaction orders according to the prioritiesidentified in (a) and (b).
 17. The method of claim 16, furtherincluding: (d) identifying any residual unresolved hedge transactionsthat remain after (c); and (e) when at least one residual unresolvedhedge transaction exists, locating at least one potential hedgetransaction.
 18. The method of claim 17, further including: (f)executing the potential hedge transaction when a order risk data rule isnot violated.
 19. The method of claim 18, wherein the rule in (f)requires that the order risk data not be exceeded after the potentialhedge transaction.
 20. The method of claim 18, wherein the rule in (i)requires that the order risk data not be exceeded before the potentialhedge transaction.
 21. The method of claim 18, wherein the potentialhedge transaction includes a plurality of contracts and (f) comprises:(i) identifying the lowest number of the contracts that will cause theorder risk date to be exceeded; and (ii) executing a transaction thatincludes the number of contracts identified in (i).
 22. The method ofclaim 18, wherein the potential hedge transaction includes a pluralityof contracts and (f) comprises: (i) identifying the lowest number of thecontracts that will cause the order risk date to be exceeded; and (ii)executing a transaction that includes one less than the number ofcontracts identified in (i).
 23. A method of executing a variabledefined derivative product order that is contingent on the existence ofa corresponding hedge transaction, the method comprising: (a) receivingat a match system a variable defined order for a derivative product,where the variable defined order comprises a derivative productidentifier, an underlying product identifier and at least one pricedetermination variable; (b) identifying a potential derivative producttransaction; (c) searching for a hedge product transaction thatcorresponds to the potential derivative product transaction; and (d)executing the derivative product transaction only when a hedgetransaction is available.
 24. The method of claim 23, further including(i) calculating a price of the derivative product order.
 25. The methodof claim 24, wherein (i) comprises using a formula supplied by the matchsystem.
 26. The method of claim 24, wherein the price of the derivativeproduct is a function of an original order price, an updated price ofthe underlying product and the at least one price determination variablevalue based on a predetermined formula.
 27. The method of claim 26,wherein the at least one price determination variable value includesvalues for a delta variable and a gamma variable and the predeterminedformula comprises: Change in price of theorder=ChgUnderlyingPrice*delta+(½(ChgUnderlyingPrice{circumflex over( )}2*gamma)) where ChgUnderlyingPrice is the change in price of theunderlying product, delta is the rate of change of the price of thederivative product with the price of the underlying product and gamma isthe rate of change of delta with respect to the derivative productprice.
 28. The method of claim 23, wherein (c) comprises searching forthe hedge product transaction on the same match system as a match systemused for the derivative product transaction.
 29. The method of claim 28,wherein the hedge transaction and derivative product transaction areboth locked in before either transaction is executed.
 30. The method ofclaim 23, wherein the derivative product comprises an options contractand the hedge product comprises a futures contract.
 31. The method ofclaim 23, wherein information for the hedge product transaction isincluded in the variable defined derivative product order.
 32. Themethod of claim 23, wherein (d) comprises executing the derivativeproduct transaction at a first exchange and executing the hedge producttransaction at an exchange other than the first exchange.
 33. Acomputer-readable medium containing computer-executable instructions forcausing a match system to perform the steps comprising: (a) receiving avariable defined order for a derivative product, where the variabledefined order comprises a derivative product identifier, an underlyingproduct identifier and at least one price determination variable; (b)identifying a potential derivative product transaction; (c) searchingfor a hedge product transaction that corresponds to the potentialderivative product transaction; and (d) executing the derivative producttransaction only when a hedge transaction is available.
 34. Acomputer-readable medium containing computer-executable instructions forcausing a match system to perform the steps comprising: (a) executing avariable defined derivative product order; (b) receiving order risk datafrom an order risk management module; (c) using a best efforts approachto locate a potential hedge transaction that corresponds to thederivative product order; (d) comparing data of the potential hedgetransaction to the order risk data; and (e) executing the potentialhedge transaction when the order risk data is not exceeded.
 35. Acomputer-readable medium containing computer-executable instructions forcausing a match system to perform the steps comprising: (a) executing avariable defined derivative product order; (b) receiving order risk datafrom an order risk management module; (c) using a best efforts approachto locate a potential hedge transaction that corresponds to thederivative product order; (d) comparing data of the potential hedgetransaction to the order risk data; and (e) executing the potentialhedge transaction up to a limit amount of risk.